All posts tagged beta

The market loves to sell high-concept sounding ideas, to get you chasing beta, say, or correlations. But SmartMoney’s Jack Hough stopped by the Markets Hub today to explain why you should be wary of those notions and a few others.

With Apple flirting with $600/share and the Nasdaq Composite rocketing 17% this year to its new perch above the 3000 level, it might seem strange to call tech the newest fuddy-duddy sector. But that’s exactly the argument that two investment banks (and one Wall Street Journal article) are making this week.

In the past few days, the equity strategy teams at Wells Fargo Securities and Bank of America-Merrill Lynch have, separately, issued a pair of pretty hefty notes arguing tech may be (in BofA’s words) “entering a new secular bull market” after 11 years of sideways churn, premised on many of the same attributes we highlighted on Monday. To boil it all down: the tech sector is a lot more reliable, steady and drab than it was during the tech bubble.

Over at BofA, Savita Subramanian and her team point out that tech valuations haven’t been this low since 1995, and note that “tech was the only sector other than health care that was able to grow earnings through every consecutive year of the recent recession.” Its earnings growth, concomitantly, has gotten more and more stable even as the sector’s other cyclical peers have gotten more cyclical.

The only fly in BofA’s ointment? “If the market were to move to a more defensive posture and away from the risk-on trade, this sector would tend to underperform, especially for the small caps,” they write. In short, while its earnings have gotten more predictable, investors still see tech stocks like they did during the halcyon go-go days of yore.

Except they don’t, argues Gina Martin Adams over at Wells Fargo. She calls tech “the new defensive sector,” noting the sector’s low beta, steady earnings, massive cash piles and rising dividends have given it a new mature edge that was missing in 1999-2000.

In terms of beta, Ms. Adams notes that the tech sector as a whole saw its one-year beta fall below 1.0 for the first time in 2007, and has slipped ever lower since. Yes, you read that right: tech stocks now see some of the most boring price action on Wall Street, by this measure. Even Apple, which as you may have heard is on a historic bull run, boasts 52-week beta of around 0.94, well below, say, Sears Holding’s 1.82, Alcoa’s 1.62 and Morgan Stanley’s 1.96 (according to FactSet).

About MarketBeat

MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what’s happening in the markets. Lead writers Paul Vigna and Steven Russolillo spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to paul.vigna@wsj.com or steven.russolillo@wsj.com.

Global investment banks got a second-quarter revenue boost from a surge in Asian stock trading. But given China’s market volatility and stock declines in some other countries, those revenue gains may be hard to replicate.